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Oxford Economics’ forecast and model

Key features of the April 2013 release. Oxford Economics’ forecast and model. mdiron@oxfordeconomics.com. April 2013. Overview. Key forecast revisions World economy boosted by Japan’s policy US underlying strength continues Eurozone hopes for ECB move Risk revisions

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Oxford Economics’ forecast and model

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  1. Key features of the April 2013 release Oxford Economics’ forecast and model mdiron@oxfordeconomics.com April 2013

  2. Overview • Key forecast revisions • World economy boosted by Japan’s policy • US underlying strength continues • Eurozone hopes for ECB move • Risk revisions • Probability of the baseline forecast revised down on Cyprus debacle

  3. Forecast overview

  4. Summary of forecast • Some disappointing data • Eurozone core weaker than previously expected at start of 2013 • US March payroll data disappointing • Emerging markets data mixed • But main factors expected to drive world growth back up remain in place • Normalisation of risk • Underlying strength of the US • Aggressive monetary policy expansion in Japan should be positive for the world • Although some companies will be hit by fiercer competition • Review of forecast for coal prices lead to significant downward revision

  5. Main revisions to growth for Japan

  6. Main revisions to growth for Japan

  7. Main changes to the forecast - Japan • Best two-year period in over 20 years • Yen weakening: nowaround 18% weaker on trade-weighted basis than a year ago. Further weakening expected to JPY114/US$ by 2015 from just under 100 currently. • Monetary easing: BoJ ‘s balance sheet to be increased by 25%. • Fiscal stimulus estimated at around 1% of GDP. • GDP growth forecast at 2.5% in 2014 and 2015 on the back of fiscal and monetary stimulus

  8. Main changes to the forecast - Japan

  9. Main changes to the forecast - Japan

  10. Main changes to the forecast - US • Forecast revised up on the back of remarkably strong consumer spending • Dent from fiscal tightening seems less than previously expected • Tighter fiscal policy is still a drag on growth • But pretty much all other aspects of the economy are positive • Monetary easing • Household deleveraging possibly close to an end • Improving housing market • Competitiveness • Cheaper energy • Favourable credit conditions

  11. US companies enjoying much better credit availability 11

  12. Consumption to be supported by pent-up demand

  13. Sequester-related revisions partially reversed

  14. Main changes to the forecast - Europe • Bucking the trend – Again. Forecast revised down • Disappointing data • Consequences of Cyprus precedent • Competition from weaker Yen

  15. Main changes to the forecast - Europe

  16. Competition with Japanese companies will hit exports

  17. Heat map reveals pockets of weakness

  18. Hoping for further monetary expansion

  19. Main changes to the forecast – Emerging markets • Small downward adjustments to short term on the back of disappointing data • Chinese forecast unchanged • But weakness in India continues, prompting a rate cut • Slight downward revisions to Brazil as structural challenges remain unaddressed • Generally, there is room for easier monetary policy should growth disappoint

  20. Main changes to the forecast – Emerging markets

  21. Brazil struggling to compete… 21

  22. …but Mexico becoming major production base 22

  23. Baseline probability revised down on Cyprus debacle • Disorderly unwinding of QE (5%) • Growth initially surprises on the upside • Inflation starts rising. Central banks accommodate, keeping QE programmes untouched • Inflation scare in bond markets. Rates rise • Central banks respond with very sharp unwinding of QE • Eurozone exits (20%) • Fiscal austerity in peripheral countries becomes unbearable. • No growth pushes unemployment yet higher. Pro-exit parties gain popularity. • No real progress on banking and fiscal union. • Run on banks, debt defaults • 6 countries exit Eurozone in 2014Q1. Policy mistakes • Faster upturns in US & EMs (15%) • Resolution of outstanding fiscal issues encourages investment and hiring in the US. • Momentum in EMs builds as trade picks up and accommodating policy feeds through • Business and consumer confidence rise as conditions improve. • Oxford forecast (55%) • Steps to ensure Eurozone survival are taken, although they are not enough to kick start significant growth • Risk premia fall, and consumer and business confidence gradually recover • Recovery limited by public and private deleveraging and weak job growth • EMs robust as policy eases and growing middle class support consumer spending and trade 23 Corporate stress

  24. Model and online databank changes

  25. Model and online databank changes • Harmonisation of definition of regions to IMF’s specifications • End of period financial variables in the online databank

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